We'd all like to invest as successfully as the legendary Warren Buffett. He calculates return on invested capital to help determine whether a company has an economic moat -- the ability to earn returns on its money beyond that money's cost.

ROIC is perhaps the most important metric in value investing. By determining a company's ROIC, you can see how well it's using the cash you entrust to it, and whether it's actually creating value for you. Simply put, ROIC divides a company's operating profit by the amount of investment it took to get that profit:

ROIC = Net operating profit after taxes / Invested capital

This one-size-fits-all calculation cuts out many of the legal accounting tricks (such as excessive debt) that managers use to boost earnings numbers, and provides you with an apples-to-apples way to evaluate businesses, even across industries. The higher the ROIC, the more efficiently the company uses capital.

Ultimately, we're looking for companies that can invest their money at rates that are higher than the cost of capital, which for most businesses lands between 8% and 12%. Ideally, we want to see ROIC greater than 12%, at minimum. We're also seeking a history of increasing returns, or at least steady returns, which indicate that the company's moat can withstand competitors' assaults.

Let's look at McDonald's (NYSE: MCD) and two of its industry peers to see how efficiently they use capital. Here are the ROIC figures for each company over several time periods:

Company

TTM

1 year ago

3 years ago

5 years ago

McDonald's

19.9%

17.6%

11.4%

12.7%

Yum! Brands (NYSE: YUM)

26%

22.6%

20.9%

19.2%

Chipotle Mexican Grill (NYSE: CMG)

25.5%

17.8%

12.6%

NM*

Source: Capital IQ, a division of Standard & Poor's.
*The company did not report an effective tax rate.

Yum! Brands has consistently remained above our 12% threshold for attractiveness, displaying consistent growth over the past five years. McDonald's also looks good; even at its low point three years ago, it was just under 12%, and it's also consistently increased its returns since then. This increasing efficiency is one reason I call Mickey D's a dividend play for a lifetime. Chipotle also looks appealing, with rapidly growing ROIC since it went public. In short, these are three top performers in an absolutely cutthroat industry.

Businesses with consistently high ROIC are efficiently using capital. They can use their extra returns to buy back shares, further invest in their future success, or pay dividends to shareholders. (Warren Buffett especially likes that last part.)

To unearth more successful investments, dig a little deeper than the earnings headlines, and check up on your companies' ROIC.

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Jim Royal, Ph.D., does not own shares in any company mentioned. Chipotle is a Motley Fool Rule Breakers selection and a Motley Fool Hidden Gems pick. Motley Fool Options has recommended a bull call spread position on Yum! Brands. The Fool owns shares of Chipotle and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.